[...] this week the Senate Banking, Housing, and Urban Affairs committee passed the Dodd-Levin Credit Card Accountability, Responsibility, and Disclosure Act of 2009 (CARD Act, S.414).
He states that this legislation
[...] seeks to put an end to unfair credit card practices that mire millions of American families in debt. [...] Under this legislation, for example, credit card companies would be prohibited from applying higher interest rates retroactively to existing credit card debt, hiking interest rates on customers who pay on time, and collecting interest on credit card debts that were repaid on time. In addition, this bill would crack down on unreasonable fees, including repeated late fees, over-the-limit fees, and fees to pay your bill, and would prohibit charging interest on those fees. It would also prohibit so-called “universal default” interest rate hikes in which a credit card company hikes a cardholder’s interest rate for reasons unrelated to the account held with that company. It would also make sure that cardholders get their bills 21 days before the bill is due and give them until 5:00 p.m. on the due date to make a payment.
(More information can be obtained from this press release.)
What needs to be realized is however "outrageous" (according to whom?) or "unfair" (according to whom?) some of the business practices are of credit card companies is irrelevant; a private business has the right to operate as it so pleases as long as its consumers mutually consent. If a consumer is ignorant enough to have signed a contract without reading that it gives the company the power to charge over thirty percent interest, he has screwed himself over and must responsibly face the consequences. Whether or not the terms are desirable is of no concern of anyone but the involved parties. This bill amounts to "but I don't wanna pay so much!"
This bill is a violation of the credit card companies' owners' rights, as it dictates how they must and must not run their business, and the price for such will be paid by yet more worsening of the economy. Let us focus on interest rates in particular.
While some companies may count on the ignorance of its consumers to be able to charge high interest rates, adjustable interest rates do serve a practical purpose in helping keep businesses afloat. Take, for instance, the economic phenomena known as inflation, where the money supply is artificially increased ("artificial" because the economic output does not warrant a monetary increase) and thereby decreases the value of each unit of money.
Any business that deals with lending money or credit must take inflation into consideration in its policies to be able to adjust when it happens, because if inflation hits during a time it has increased its loans or has not all of its loans paid back it must increase interest rates lest it lose money. A simple illustration:
Let us say, for example, that you loan $1000 to a friend who is hard on his luck and you both agree to have the debt repaid two years later in a lump sum payment. What if, during those two years, the Federal Reserve was to double the money supply? The value of each unit of money is cut in half, so by the time your friend pays you back, you are getting the same amount of money back in monetary terms, but only half the value; you lent out $1000 in value but received only $500 back. To clarify our thinking, we could appropriately and literally think of this as losing money.
Businessmen realize this, and so they raise interest rates when the economic forecast yields that the value of money will decrease during the repayment of a debt. To prohibit outright increasing interest rates or to set a price ceiling is to force businesses to take a loss and risk bankruptcy.
But this is not the only reason interest rates increase and need to be adjustable. What if a credit card company's consumers start defaulting on their debt in large numbers? They have to raise interest rates on those that are repaying their debt (assuming the contracts allow it). What if governmental or economic factors make it more expensive to operate the business? Again, interest rates will have to increase. But the CARD Act will prohibit such actions, or at the very least make them much harder to go through on short notice (which will be harmful if immediate action is required).
We need not wait to see the long-term or even short-term consequences of this legislation if it should happen to pass, for we already have our concrete example in the banking crisis. The Community Reinvestment Act changed the lending practices of some banks by forcing them to lend to non-creditworthy people. Lending to non-creditworthy people means the banks run a much great risk of losing money from people not repaying their debt. The banks could have survived such legislation if they were allowed to increase their interest rates so as to recoup the losses, but not only were they prohibited from doing so, the Federal Reserve set the interest rates for them.
We have seen the results.
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